Global Credit Research - 14 Dec 2017
New York, December 14, 2017 -- Moody's Investors Services has assigned a Baa1 to New Jersey's $175 million State Contract Refunding Bonds (Hospital Asset Transformation Program), Series 2017 issued by the New Jersey Health Care Facilities Financing Authority. The outlook is stable.

RATINGS RATIONALE

The Baa1 is notched off the state's A3 GO rating, reflecting the need for annual legislative appropriation of state contract payments backing the bonds. A large majority of the state's net tax-supported debt is subject to appropriation, and the importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.

New Jersey's A3 rating primarily reflects its significant pension underfunding, large and rising long-term liabilities, a persistent 11% structural budget imbalance, and weak 1.3% fund balances. Despite large increases in pension contributions since 2012, the state's contributions remain well below actuarial recommendations. Moreover, tax cuts enacted in January 2017 and a reliance on optimistic revenue growth assumptions to balance the budget may make it harder for the state to keep pace with its statutory pension contribution schedule. The state nevertheless benefits from a diverse economy and high wealth, as well as the governor's broad powers to reduce expenditures.

RATING OUTLOOK

The stable outlook reflects our view that the current A3 rating is well positioned for the next 12-18 months due to solid economic performance and the expectation that any fiscal 2018 budget gaps will remain manageable. However, in the longer term, the state's credit profile will continue to weaken as large long-term liabilities grow and the state's budget is challenged by growing pension contributions in a low revenue growth environment.

- A significant increase in unfunded pension liabilities, for example due to weak investment returns

LEGAL SECURITY

BONDS SECURED BY STATE CONTRACT PAYMENTS

The bonds are payable solely from anticipated state contract payments to be made by the State of New Jersey directly to the trustee. The state's contract payment obligation is absolute and unconditional once the legislature has appropriated sufficient funds for debt service each year.

In the event of a failure by the legislature to appropriate sufficient funds for debt service, there are no substantive remedies available to the authority or to bondholders, and there is no debt service reserve fund associated with the bonds. However, debt service payment dates on October 1 and April 1 mitigate potential risk that might arise from a delay in annual budget adoption. In addition, approximately 84% of New Jersey's net tax-supported debt is subject to appropriation. The importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations.

USE OF PROCEEDS

Bond proceeds will refund outstanding bonds for net present value savings with no extension of maturity.

New Jersey’s Liberal New Governor Faces a Fiscal Nightmare
Raising taxes will be even harder now that Congress has limited the state and local tax deduction.

Spoiler:

Democrat Phil Murphy cruised to victory in New Jersey’s gubernatorial race in November. The state’s powerful public-sector unions, which endorsed his progressive vision of higher taxes and more spending, played a pivotal role in his 14-point victory. Now the hard part begins.

As he takes office later this month, Mr. Murphy must confront the state’s biggest problem—a pension system that is about $90 billion short of what it needs to pay future benefits. He has already promised to devote some of the new revenue from his proposed taxes to pensions, but he can’t fully shore up the system without benefit reductions. And the unions that supported him have fiercely resisted such cuts. Can a progressive Democrat elected with the help of unions govern responsibly in an age of exploding public-employee costs and limited tax resources?

New Jersey’s Liberal New Governor Faces a Fiscal Nightmare
PHOTO: ISTOCK/GETTY IMAGES
New Jersey’s pension woes aren’t new. A succession of governors and legislatures enhanced worker benefits without properly accounting for their costs. In 2010 the Securities and Exchange Commission cited the state for fraud because of the way it misled investors about its retirement system’s funding problems. It was the first state to earn this dubious distinction.

The state’s powerful unions have played such a key role in the crisis that even some Democrats lost patience. In 2010 state Senate President Stephen Sweeney, a Democrat, described how unions had consistently pressured legislators for higher benefits while ignoring the system’s funding problems. “The union leaders need to take off their blinders and stop ignoring their own complicity in this problem,” he wrote.

The following year Gov. Chris Christie and a bipartisan group of legislators enacted reforms that rolled back some benefit increases for employees and retirees. But the group’s optimistic assumptions of how much the state would save didn’t pan out. The state government also had trouble keeping up with the increased contributions mandated by the reform legislation, thanks to weak growth in tax revenue.

Trenton has since set out a new plan that dedicates $1 billion a year from the state lottery to pensions. But even with the lottery cash, the state must contribute an additional $5 billion a year of taxpayer money to save the system.

That’s much more than New Jersey—which has never paid more than $1.9 billion a year from tax revenue into its retirement system—can afford. The state, which will collect some $35 billion in taxes this year, now says it will gradually increase pension contributions until they reach an adequate level in 2023. But it’s hard to see how Trenton can get there without wrecking its budget.

Even if New Jerseys’s tax collections grow by the same rate as in the past five years—the current recovery’s most robust—pension contributions alone would eat up two-thirds of new revenue. According to calculations I’ve outlined in a forthcoming Manhattan Institute report, “Garden State Crowd-Out,” this would leave little room to pay for increases in other budget items. Meanwhile, Trenton must also replace the $1 billion in lottery revenue previously used to fund other budgetary programs.

The whole scenario is overly optimistic, because the nation is already in the ninth year of an expansion. The Rockefeller Institute of Government recently reported that state and local tax collections are slowing around the country. If the country faced even a mild recession sometime in the next several years, New Jersey’s prospects for bailing out the system would become even more remote. Moody’s concluded in October that a recession would harm New Jersey more than most states, causing a $3.5 billion hit to its budget.

Mr. Murphy ran pledging $1.3 billion in new taxes, targeting the rich in a state with one of the country's highest tax burdens. Some Democratic legislators already have balked at the proposed levies, given Congress’s imposition of a limit on the state and local tax deduction. But even assuming all of the governor-elect’s proposed taxes make it into law, much of the new revenue would quickly disappear into Mr. Murphy’s newly proposed spending programs. The relentless rise of pension and employee-benefit costs and the need to replace lottery revenue would only make the situation tougher.

Yet continuing to shortchange the system is untenable. The bipartisan New Jersey Pension and Health Benefits Study Commission last month warned of the unprecedented risks the Garden State faces if the system continues to deteriorate. The commission has proposed reforms that would save the system by moving workers out of their defined-benefit plan and into individual retirement accounts similar to 401(k) plans. It also proposed reducing state employees’ health-care benefits to the same level private-economy workers enjoy. The savings would be redirected into the pension system.

Unions vigorously fought the new plan in the hopes they could help elect the next governor. They succeeded. What happens next will determine who really runs the Garden State.

Mr. Malanga is a fellow at the Manhattan Institute and a senior editor for City Journal.

New Jersey's Republican state treasurer sharply reduced the New Jersey Pension Fund's assumed rate of return, producing a financial and political dilemma for Gov.-elect Phil Murphy, a Democrat, who will be sworn in later this month.

Last month, Treasurer Ford Scudder announced a cut in the assumed rate of return to 7% from 7.65% for the fiscal year that starts July 1, the second rate cut in 12 months. Last February, he reduced the rate to 7.65% from 7.9% for the current fiscal year.

The lower rate means cash-strapped municipalities and the state must raise more money to feed the severely underfunded New Jersey Pension Fund. Mr. Murphy will be hard-pressed to find politically palatable and sufficient additional revenue sources, even from a Democratic Party-controlled state Senate and Assembly.

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As of July 1, the funding ratio ​ was 59.3%, according to the state Treasury Department. This statutory funding status includes the estimated present value of the state lottery. Last year, Gov. Chris Christie signed a law making the lottery an asset of the pension fund, using the proceeds to cover part of the state's pension contribution.

Pension experts say the 7% assumed return figure represents a more realistic rate given forecasts for lower stock market gains and modest interest rate increases. They also said the size of the cuts within the time frame is unusual.

"It's pretty dramatic," said Richard Keevey, a lecturer at the Woodrow Wilson School, Princeton University, and a senior policy fellow at the Bloustein School of Public Planning and Policy at Rutgers University. "I would have been inclined to reduce it over time." Mr. Keevey is a former New Jersey state budget director and comptroller.

"It is significant, but we are getting realistic," said Thomas Brendan Byrne Jr., chairman of the State Investment Council, which develops policies for the Treasury Department's division of investment to manage the pension fund's investments. The Trenton-based fund has $76.6 billion in assets.

The New Jersey Pension Fund produced a 13.07% return for the fiscal year ended June 30. The annualized return for the past three fiscal years was 5.25%; for five years, 8.75%; and for 10 years, 5.55%.

Political overtones
Some observers of New Jersey government said the rate reduction appears to have had some political overtones.

Marc Pfeiffer, assistant director, Bloustein Local Government Research Centers, Bloustein School of Planning and Public Policy, Rutgers University, New Brunswick, N.J., said the rate reduction can be seen "as a parting shot" by Mr. Christie toward his successor.

"Murphy has some very challenging decisions ahead in regard to pension funding," Mr. Pfeiffer said.

The governor-elect last month, through a spokesman, attacked the decision to lower the assumed rate of return. The spokesman, Dan Bryan, described the move as "playing politics" by "rushing this decision at the 11th hour."

In a prepared statement, Mr. Bryan said such a "significant change" should be phased in. "At a time when our taxpayers are already taking a hit, our focus should be on lessening the burden of property taxes, not increasing it," he said.

Mr. Bryan was referring to the impact on municipalities which, according to actuarial reports and the treasurer's office, must come up with an extra $422.5 million in pension fund contributions for the 2019 fiscal year under the 7% rate. By law, they must contribute 100% of their actuarially required contribution, and they don't have many choices for raising revenue.

"The change in the assumed rate of return has made budgeting more difficult at the state and local levels," said Lisa Washburn, a Summit, N.J.-based managing director for Municipal Market Analytics, a research firm.

Tax tension
In New Jersey, "the No. 1 anger point is local real estate taxes," said Thomas J. Healey, chairman of the New Jersey Pension and Health Benefit Study Commission, noting local governments have few revenue-raising choices. "There's not a lot of room or flexibility in the (state) budget."

The goal of the commission, created in 2014, was to make multiple changes in the management of state benefits including reducing health-care expenditures and making revisions to the pension system.

Major pension recommendations from the commission included freezing the New Jersey Pension Fund and creating a cash balance plan for current and future participants. The Legislature didn't act on these suggestions.

Of the seven systems in the New Jersey Pension Fund, two rely on contributions from the state and municipalities — the Public Employees' Retirement System and the Police and Fire Retirement System. These systems plus the Teachers' Pension and Annuity Fund, which relies solely on state contributions, account for about 97.5% of the New Jersey Pension Fund assets.

"After much analysis, the treasurer concluded that the assumed rate of return of 7.65% warranted further reduction," Will Rijksen, a spokesman for Mr. Scudder, wrote in an email on Jan. 2.

Mr. Scudder's decision was based on "Division of Investment internal return assumptions, feedback from the actuaries of the respective retirement systems (and) market return assumptions from external consultants," Mr. Rijksen wrote. The treasurer's analysis also included a "general understanding of market return expectations of external financial professionals and (discussions with) members of the state investment council."

Reducing the return assumption also means the state must contribute more for the next fiscal year. If it were contributing its full actuarially required amount, the extra cost would be $390 million. Because the state is scheduled to pay 60% of the required amount the next fiscal year, it will contribute an extra $234 million under the lower return assumption, Mr. Rijksen wrote.

The state legally doesn't have to make full payments each year — and it doesn't. Over the years, governors have ignored payments, made fractional contributions or cited fiscal crises for last-minute cuts in the state's annual contribution. For the current fiscal year, for example, the $2.5 billion state contribution represents 50% of the actuarially required contribution.

Securing more money to expand the state's contribution will prove tough for Mr. Murphy, who, during his gubernatorial campaign, advocated a tax on the state's wealthiest residents to help pay for improved pension system funding.

However, some legislators have cooled on this idea following the passage of federal tax reform. The federal law affects high-tax states, including New Jersey, because it limits the deduction from federal taxable income of state and local property taxes and sales and state income taxes to $10,000.

Seeking a new tax on wealthy residents losing many federal deductions of state and local taxes will be a tough sell for Mr. Murphy.

"This puts a lot of pressure on the 'millionaires' tax,'" said Mr. Healey.

A 'challenging' increase
The pressure on the state's finances was outlined recently in a report by Moody's Investors Service. If the state sticks to its schedule of raising its annual pension contribution 10 percentage points at a time, "the largest year-over-year increase will be in fiscal 2019 when the combined contribution from the state lottery and the general fund will increase to $3.4 billion," based on the 7% return assumption vs. $2.5 billion for the current fiscal year based on the 7.65% return assumption. The lottery is good for about $1 billion annually of the state's contribution.

"The state's ability to increase its pension contributions on schedule will be critical to reversing its pension cash flow deficit and maintaining a stable credit profile," the Moody's report said.

S&P Global Ratings has a glum view of New Jersey's prospects. "Putting off paying the 100% is putting themselves in a hole for future years," said David Hitchcock, senior director in the U.S. public finance-states group at S&P Global, referring to state payments below the actuarially determined contributions.

Although S&P rates New Jersey's general obligation bonds A minus with a stable outlook, a December report said the state's pension system "remains among the worst funded in the nation and a primary reason why our GO (general obligation) rating on New Jersey is the second lowest of all the states." S&P's analysis doubted the state could raise it contributions to reach full annual pension contributions within five fiscal years.

The size and speed of the New Jersey rate reduction was "unusual, but it's a move in the right direction," said Alicia Munnell, director of the Center for Retirement Research at Boston College, describing as "untenable" the state's pension predicament.

"The problem won't be solved by reducing the assumed rate of return," she added. "New Jersey needs to get everyone to the table, divvy up the pain and reach a solution."

N.J. and towns could be slammed by Christie pension move, Trump tax law and more

Spoiler:

Looks like 2018 is going to be a tough year for New Jersey's state and local governments.

A Wall Street agency said Wednesday that New Jersey and its local governments will be fighting pressures on multiple fronts as they grapple with the expiration of a key property tax control, a changing federal tax landscape and rising pension bills.

S&P Global Ratings warned that these three developments, which emerged as Gov.-elect Phil Murphy prepares to take office, risk "potentially straining both state and local budgets."

One, a reduction in the rate of return the state assumes it will make on its pension investments, will jack up state and local employers' recommended contributions to the public pension fund by $813 million next year, as first reported by NJ Advance Media.

These extra dollars going in will be a boost to the grossly underfunded system but pose yet another challenge to already tight state and local budgets.

Gov. Chris Christie's administration cut the assumed rate of return from 7.65 percent to 7 percent, which is in line with other large funds and is a more conservative estimate of what pension investments can achieve over the long term.

Local governments, which by law have to pay the full contribution recommended by actuaries, will have to come up with an additional $422.5 million for the fiscal year that begins in July.

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"How this increase is spread across the more than 1,600 local government employers in the plans remains to be seen, but we anticipate pension costs will materially increase for some issuers," S&P said. "Municipalities and counties can exceed the property tax cap for pension costs, but they must be willing to do so."

Meanwhile, the state's contributions will be largely left to Murphy, who will introduce a proposed budget next month. If he keeps to Christie's payment schedule and kicks in 60 percent of the actuarial recommendation, Murphy will have to find another $234 million in the budget.

The second change, the expiration of a 2 percent cap on the salary increases police and firefighters can win in arbitration, "could cause municipal public safety costs to increase faster than the 2 percent local property tax increase limitation, which still remains in effect," analysts said.

The 2 percent cap expired at the end of December. Local government leaders who favored its extension said these arbitration awards, which are rare, set the tone for and helped keep raises reached through voluntary contract negotiations in check.

Prior to the cap, arbitration awards ranged from 2 percent to nearly 6 percent, according to data from the Public Employment Relations Commission.

Local government budgets are still hemmed in by a 2 percent limit on increases in spending that local government officials say will force them to slash spending or go around the spending cap to increase revenue.

In addition, analysts said, "the effects of federal tax reform will also ripple throughout the state."

S&P warned of a potential influx of reported income and tax payments but of a drop-off in corporate income tax collections as corporations seek to benefit from lower federal corporate tax rates in 2018.

"It might take time to determine what portion of the increased revenue is of a one-time versus an ongoing nature, which will increase forecasting uncertainty in the first half of fiscal 2018," the report said.

"At the local level," S&P cautioned that the $10,000 federal income tax cap on state and local tax deductions could depress home values and sour potential homebuyers.

"This could result in weaker tax bases, higher tax rates, and political resistance to levy increases at the local levels as residents in turn face higher federal and state taxes," the report said.

New Jersey has borrowed nearly $1 billion to renovate the State House, build new offices in Trenton and redevelop a pedestrian strip near Rutgers University — all without asking permission from voters, as required by the state's constitution.

That borrowing, much of which took place during Chris Christie's last year as governor, used an accounting trick to evade the requirement for voter approval: Essentially, the bond payments were structured as leases, with the state serving as its own landlord.

It was a novel move for a state with the fourth-highest debt burden per person in the country and the second-lowest credit rating.

Officials likely reasoned that, given the depth of the state's fiscal woes, borrowing millions to build offices and renovate the State House would have been a tough sell to voters, said Bruce Afran, an attorney for Assemblyman Reed Gusciora, D-Mercer, and the Trenton property owners who unsuccessfully challenged the $376 million bond sale that took place Jan. 8.

"The issue of debt in New Jersey is so prevalent that voters almost certainly would turn down most of these projects," Afran said. "This device of using the EDA to rent it back evades the people, who almost certainly would have voted no." He was referring to the state Economic Development Authority.

THE BONDS: New Jersey bond sale adds nearly $376M in debt

CHRISTIE LEGACY: Chris Christie leaves a complicated record

Last June and this January, the state sidestepped the constitutional requirement by packaging nearly $700 million in bonds as lease payments from one state agency to another.

Those moves flew in the face of what state residents decided in 2008, taking borrowing power away from the governor's office and placing it in the hands of voters.

But increasingly, the state has turned to the lease-revenue model, in which bondholders are repaid with rent from one state agency to another, and not asked for voter approval before going deeper into debt. And taxpayers are still on the hook for paying off all that state debt.

The annual tab just to pay debt is roughly $4 billion.

Debt burden ever-increasing
Academics and credit-rating agencies have been sounding the alarm over New Jersey's debt burden for years. Under Christie, Wall Street ratings agencies downgraded the state's credit 11 times, which increases the interest that taxpayers must shoulder when the state borrows money.

New Jersey spends twice as much per year to pay its debts as the combined cost of operating state prisons, police and other law enforcement.

The debt stands as an obstacle to new Gov. Phil Murphy's plans to step up state payments to the beleaguered pension system, to restore funding to public schools and to provide free tuition at community colleges.

Murphy has not said whether he plans to continue the Christie-era practice of packaging some debt as leases to avoid voter approval.

In the latest example of the state's workaround, the offices for taxation, agriculture and health will pay rent to the Economic Development Authority, which will use the money to pay off $216.5 million in bonds to finance two buildings to house the agencies.

A group of Trenton property owners and lawmakers unsuccessfully challenged the deal in court, saying the state was trying to evade the constitutional requirement for voter approval of general debt by disguising the obligation as a lease.

"The lease for the State House and the leases for these new EDA projects are going to obligate the taxpayers of New Jersey to spend $750 million — three quarters of a billion dollars — over the next 30 years," said John Wisniewski, a former Democratic Assembly member who was a plaintiff in the case. "Never once were the voters consulted. It doesn't pass the smell test."

New Jersey voters have decided just two bond measures since 2010, both in favor: $750 million for upgrades to state colleges in 2012 and $125 million for public libraries last year.

Since that time, the Economic Development Authority has issued $237 million in lease-paid bonds for the Rutgers project; $8 million to redevelop the state police barracks; $60 million for charter schools; $300 million for the State House renovation, and $376 million for the state offices and two new youth prisons.

Evading the will of the voters
In 2008, as concerns about debt burdens on current and future taxpayers mounted, about 58 percent of New Jersey voters approved a constitutional amendment to require voter approval for the state to take on new debt.

The ballot measure created an exception for special-purpose debt with a specific source of money to repay it, such as building dorms at Rutgers and paying off the debt with rent money from students.

Since then, the state has used the Economic Development Authority — which had issued bonds to help private companies expand in New Jersey — as a financing tool for its own projects, such as office buildings and extensive repairs to the 18th-century State House in Trenton.

The EDA can issue bonds with only the approval of its own board; the New Jersey Building Authority, which earlier financed most state building projects, has to go to the Legislature for approval.

Willem Rijksen, a spokesman for then-Gov. Chris Christie's Treasury Department, defended the practice of routing bond issues through the EDA without going to voters.

"The EDA has been issuing debt for state office buildings for the past 25 years and has the legal authority to finance such projects," Rijksen said in an emailed response to questions. "Therefore its financing of the State House, Trenton offices and other state building projects is appropriate."

Poor fiscal health
The Mercatus Center at George Mason University rated New Jersey last among the 50 states in the fiscal health of its government. Center researchers faulted New Jersey for "weak" and "ineffectual" enforcement of budget rules, including the ban on issuing bonds without voter approval. They noted that many other states also have routed bonds through "independent" authorities as an end-run around voters.

During his final state of the state speech on Jan. 9, Christie repeatedly defended his administration's fiscal record, particularly on debt. He said he has slowed the rate of growth of state debt from 10 percent a year to about 2 percent. And in a Jan. 12 report, his Treasury Department cited $499.2 million in savings from refinancing bond issues at lower interest rates.

"We have stopped the decade of exploding growth of debt initiated by our predecessors," Christie said.

FACT CHECK: Some of the true and not so true moments from Christie's last speech

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Even so, taxpayers continue to pay more in interest on the state's debt. During the year ended June 30, 2016, taxpayers paid $4.2 billion to service the state's $171.6 billion in long-term debt, up from $3.3 billion the year before, according to state fiscal records. State officials projected $3.7 billion in debt service payments this year.

New Jersey's debt load of $4,388 per resident is more than four times the national average, but ranks as less of a concern than the state's future pension and retiree health care costs, said Howard Cure, director of municipal bond research for Evercore Wealth Management in New York.

"New Jersey has a lot of problems," Cure said. "I haven't viewed their debt as overly cumbersome. I am much more concerned about their pension and health care liabilities and the sluggishness of their economic recovery."

The state budgeted $146.2 million in the year ending June 30 for lease payments by state agencies to the EDA and other landlords, down from $150.8 million the previous fiscal year.

The state declined to break down lease payments from one state agency to another as opposed to a private landlord. The future State House and Trenton office building projects are not reflected in the $146.2 million figure.

EDA officials noted that the authority has financed several projects for state tenants over the last 30 years, including the New Jersey Performing Arts Center in Newark, state office complexes in Trenton, Camden and Asbury Park, and the Liberty Science Center in Jersey City.

"It's used for many different reasons, including a little bit of nimbleness," said Maureen Hassett, senior vice president of the agency. "We have a real estate team here, and we're accustomed to issuing tax-exempt bonds on behalf of the treasurer."

Truth in Accounting released its second Financial State of the Cities report, a comprehensive analysis of the fiscal health of 75 of the nation’s 77 most populous cities based on fiscal year 2016 comprehensive annual financial reports.

This year, the study found that 64 cities do not have enough money to pay all of their bills, and in total, the cities have racked up $335.4 billion in unfunded municipal debt. The study ranks the cities according to their Taxpayer Burden or Surplus™, which is each taxpayer’s share of city bills after available assets have been tapped. Check out the data for your city at the State Data Lab.

As it turned out no city in New Jersey made the list. The reason….

However, TIA was unable to rank and grade two of the most populous cities—Newark and Jersey City in New Jersey—because they do not issue annual financial reports that follow generally accepted accounting principles, or GAAP. As a result, TIA included the next two most populated municipalities: Fort Wayne, Ind., and Irvine, Calif.

I knew about this going back to 2011:
.

.
As bad as the situation is for cities that follow accounting rules, imagine the messes we have hiding in New Jersey. Off-budget revenue, ‘trust’ funds raided, debt supplementing taxes, and still, from what we are allowed to see, the highest-taxed state in the worst fiscal condition.

The state’s bankers are concerned with Gov. Phil Murphy’s state bank idea, saying it is an unnecessary move that could disrupt the local network of banks.

The idea was discussed at the Assembly Financial Institutions and Insurance Committee hearing Monday — the first such legislative discussion of what was one of Murphy’s campaign issues.

Assemblyman John McKeon (D-Madison) said the idea of a state bank in New Jersey is rife with challenges, but acknowledged that the state needs to do something to think outside the box and boost its economy.

Though the Assembly has yet to produce a bill, testimony Monday relied largely on public comments made by Murphy and a state Senate bill recently introduced by Sens. Nia Gill (D-Montclair) and Richard Codey (D-Livingston).

The bill calls for a 13-member board and allows the bank to help with leasing and selling land, sell federal funds, receive deposits from public sources and other financial institutions, and make transportation project loans, education loans and small business loans.

In recent months, experts have discussed the idea of the bank in comparison with city banks around the country, and in comparison with the precedent set in 1919 with the state bank in North Dakota.

Michael Affuso, executive vice president of the New Jersey Bankers Association, said that the comparison to North Dakota is an unfair one, since North Dakota’s bank was aimed at serving farmers in a state with a much more spread out population.

That is nothing compared to the densely populated state of New Jersey, even with its few banking deserts.

“According to government data, the state bank is unnecessary and will not do what advocates believe it will do,” Affuso said.

Affuso cited a 2011 paper from the Federal Reserve Bank of Boston, which addressed the idea of a state bank that was being floated in Massachusetts.

The report concluded that even the North Dakota bank doesn’t operate independently, but rather as a partner to the local network of banks.

McKeon suggested that a partnership would be a better option for the state anyway.

Of the criticisms that have helped garner support for the state bank idea, Affuso said two of three are untrue, and that the solution to the third — offshore holding of state money — can be determined with the local banks.

According to the state budget, $1.5 billion of New Jersey money is invested in foreign banks.

The state treasurer could be directed to break up that total into blocks that local banks could bid on, Affuso said.

The size of the blocks could vary, making it easier for smaller banks to also get a piece of the pie.

Two of the other criticisms are that local banks, despite holding municipal deposits (which accrue interest), don’t invest locally, and that the banks aren’t doing a good job of lending to low-income customers and small businesses.

Municipal banking represents 20 percent of local bank business, according to Affuso.

He said the criticisms of local benefit are not accurate, based on FDIC data, which has shown lending from local banks consistently trends upwards.

When it comes to small business lending, Affuso agreed to criticisms that some institutions are not taking advantage of the U.S. Small Business Administration programs.

“SBA lending is a very small piece of small business lending, total,” he said. “If you only look at SBA, you get an unclear picture of what’s going on.”

Of the 140 banks that exist in New Jersey, 95 are represented by NJ Bankers.

New Jersey Citizen Action is one of the proponents of the state bank. It has been working on laying the groundwork for a state bank since 2016.

Executive Director Phyllis Salowe-Kaye said the group has a vision that would not disrupt existing financial institutions in the state, but, rather, work with them.

The group has met with Murphy and had a number of discussions about the idea, and will be releasing a white paper from the last two years of researching the potential benefits of a state bank in New Jersey from a national as well as regional perspective, she said.

Salowe-Kaye said that relying on a volatile Wall Street and slow responses from Washington, D.C., especially after Hurricane Sandy, were not smart decisions for the state. Especially at a time when the state is faced with a crumbling infrastructure and an ongoing battle of who should be footing the bill for the Gateway project, she said.

“New Jersey is in the throes of tough times and we will continue to face enormous economic challenges in the foreseeable future,” she said.

NJ Citizen Action brought together a number of financial experts, nonprofits including the NAACP and Latino Action Network, and consultants to help develop a strong basis and grow support for the state bank idea.

The white paper will address key stakeholders, including government, the banking industry and advocates, Salowe-Kaye said.

“None of us are under the illusion that the state-owned public bank would be a panacea,” she said. “We have an extraordinary opportunity to work here at the state level and become a forward-thinking government in New Jersey.”

The hearing Monday is one of many planned as legislators look to develop practical policy for the governor’s vision.

REPORT
Garden State Crowd-Out: How New Jersey's Pension Crisis Threatens the State Budget

ABSTRACT
The Rockefeller Institute of Government at the State University of New York defines a government pension system that’s below 40% funded as in crisis. New Jersey’s pension system is well below that line, and the cost to fix the system, even under optimistic economic and financial-market projections, is already enormous. After a nine-year expansion, if America’s economy turns down in the coming months, the price of fixing New Jersey’s pension system will surge higher still. Yet even when the costs were considerably less, the state’s political leaders balked at fixing the system. We’ve now reached the point where neglecting to construct an adequate and lasting fix pushes the pension system on a path toward failure, a catastrophic scenario for New Jersey’s public employees and taxpayers.

New Jersey Senate President Steve Sweeney unveiled a plan on Tuesday to boost funding for schools by raising taxes on some corporations, offering an alternative to Gov. Phil Murphy’s millionaires tax a week before the governor proposes his budget to the legislature.

Sweeney, who has lately argued against raising taxes, said he wants to impose a three percent surcharge on corporations earning more than $1 million in net income. That would generate $657 million in annual revenue, his office said, which would help pay for a $758 million school funding overhaul Sweeney also announced Tuesday.

Murphy, a Democrat, is expected to include revenue from a tax hike on millionaires in his budget proposal on March 13, potentially setting up a showdown with Sweeney, who has called a millionaires tax a “last resort.” Murphy’s millionaires tax would generate roughly $600 million for the state’s coffers.

Sweeney (D-Gloucester) said he didn’t see his plan as an alternative to a millionaires tax, though he noted that corporations, unlike individuals, can still fully deduct state and local taxes under the new federal tax law. He said he didn’t tell Murphy’s office about his school funding plan before publicly announcing it.

“This isn’t me against him,” Sweeney said. “This is myself as a senator, as a Senate president, looking at ways to find funding for our schools. I think this is one that does the least amount of damage to the state of New Jersey.”

Murphy was receptive to Sweeney’s corporate tax hike idea when asked about it during an unrelated news conference, saying it has “some appeal.” But he said he had concerns about how it would affect smaller businesses that just surpass the seven-figure threshold and said he didn’t see it as an alternative to increasing taxes on the wealthy.

“It perhaps is an additional weapon at our disposal,” Murphy said. “I love the creative thinking that’s coming from any corner. But we’re going to give that—we’re going to give that some more thought, absolutely.”

Sweeney said his proposed corporate tax hike on about 2,375 companies would allow the state to “recapture” the windfall that businesses received as a result of the federal tax law. His office said corporations got a $2.9 billion federal tax cut on profits made in New Jersey under the Republican-led tax overhaul, which cut the federal corporate tax from 35 percent to 21 percent. Sweeney’s plan would raise the state Corporate Business Tax rate from nine percent to 12 percent on businesses earning more than $1 million in net income

“We’re not going into their pocket. This is a windfall, so we’re asking for a portion of the windfall to help taxpayers,” Sweeney said. “This is $2.9 billion they don’t have, that the federal government is giving them as a gift.”

Sweeney said he would pay for his $758 million school funding overhaul with nearly all of the $657 million in new revenue, though $26 million of those new funds would have to go to environmental programs as a result of a previous constitutional dedication. The rest of the money in Sweeney’s plan would come from taking $127 million from so-called “overfunded schools” that Sweeney argues have been getting too much state aid under the School Funding Reform Act.

Sweeney’s plan would dedicate $431 million for special education aid for every school district, $277 million in increased aid to underfunded districts and $50 million in additional preschool grant funding.

The corporate tax hike idea was welcomed by liberals and criticized by conservatives.

Gordon MacInnes, president of the New Jersey Policy Perspective think tank, said Sweeney’s plan is “a sensible step to recoup some of the windfall that profitable corporations will get from the new federal tax law.”

“But let’s be clear: by itself, it will not produce enough new revenue to invest in New Jersey’s neglected assets and put the state back on the path to prosperity. It is, in short, a welcome first step,” he said in a statement.

Senate Minority Leader Tom Kean Jr. (R-Union) said tax increases would put New Jersey at a competitive disadvantage in trying to lure businesses to the state.

“If we raise taxes even higher, we won’t ‘recapture’ anything from businesses that choose to move away to the many other states that will let them keep their federal tax savings,” Kean said in a statement. “The price for bad tax policy doesn’t fall on faceless corporations, but on middle-families that lose jobs, raises, and an opportunity to build financial security.”

Sweeney, who has supported a millionaires tax in the past, has recently said the new federal tax law has forced him to re-examine any plans to raise taxes. That’s because the tax overhaul capped the state and local tax deduction at $10,000, a move seen as harming high-tax states like New Jersey, which is said to have the highest taxes in the nation.

Despite Sweeney’s opposition to the millionaires tax, Murphy doubled down on his call for raising taxes on the wealthy during a speech last week. He has also called for closing a tax loophole that allows corporations to shift profits made in New Jersey to lower-taxed states, something that could generate $290 million.

In addition, Murphy has said that taxing “carried interest”—or performance fees earned by hedge fund and private equity managers—would generate $100 million a year.